Heated competition cools wireless price growth

Canada’s wireless market has been churning out new subscribers at a fast pace for the past two years, but the wave of customers now comes with stalling prices, because of larger monthly data packages and increased competitive pressures.

National carriers Rogers Communications Inc., BCE Inc. and Telus Corp. added a total of more than 330,000 new customers on contract in the second quarter. Regional players Shaw Communications Inc.’s Freedom Mobile and Quebecor Inc.’s Vidéotron,meanwhile, attracted about 85,000 between them in their most recent quarters (Shaw’s reporting period does not line up directly with the calendar quarters). Momentum in subscriber growth has been a sustained theme because of a stronger economy, population growth and an increase in cellphone penetration as more Canadians sign up for smartphone service or add second devices.

But the major new trend that emerged from the second quarter was a decline in what used to be predictably strong increases in monthly prices. The industry now uses average billing per user (ABPU) as a key metric to gauge growth, and while Rogers maintained ABPU growth of 4 per cent in the quarter, both BCE and Telus posted ABPU increases of just 0.6 per cent, down from previous years.

To be clear, the average amount the companies charge customers every month is still high: $64.80 for Rogers, $67.24 for Telus and $67.71 for BCE. (ABPU comparisons between the three are complicated somewhat by the fact that BCE is steadily acquiring lower-revenue customers from Rogers on a long-term government contract that Rogers previously held – inflating ABPU growth for Rogers while reducing it for BCE.)

Yet RBC Securities Inc. analyst Drew McReynolds says to look for a “continued deceleration in wireless ABPU growth,” pointing to increased competition from Freedom Mobile, which is investing in its network, distribution and handset lineup and began offering a range of lower-priced plans with large monthly data packages last fall. By the December shopping period, the incumbents responded with their own deeply discounted plans for a five-day period, and while more limited than that holiday frenzy, price promotions on plans with more data have continued through the first half of this year. This has also led to less revenue from overage fees because customers are not exceeding their monthly usage limits.

In a report earlier this month, Mr. McReynolds also pointed to government and regulatory scrutiny as a factor in slower price growth. The federal government has ordered the Canadian Radio-television and Telecommunications Commission to hold a public hearing on aggressive telecom sales practices, and the CRTC itself has asked the Big Three to propose new low-cost, data-only wireless plans. But the incumbents desperately want to avoid even more regulation of their industry, which could include rules mandating that they resell airtime to new competitors without networks of their own.

Telus chief executive Darren Entwistle highlighted regulatory risk as a factor making lower ABPU growth the “new normal,” stating during the company’s second-quarter conference call: “I think we’ve shown as an industry that we can make a lot more money for shareholders, and do a lot better for customers, through strong competitive intensity amongst the players of the industry versus near-term profit aggrandizement that invites regulatory interventions.

“What I’m saying here is to be mindful of inviting that eventuality by being overt in our expectations that [ABPU] accretion can happen on an endless basis,” he added.

In a report last week titled “A reminder that strong volume is not the most important valuation driver,” Scotia Capital Inc.’s Jeff Fan said the lifetime value of wireless customers is most crucial to a company’s stock valuation. The key factors in lifetime value, he argues, are not subscriber additions, but ABPU growth and churn, the monthly rate of customer turnover.

“With slower ABPU growth for two of the Big Three incumbents and higher year-over-year churn for all three incumbents, even with higher [net additions], we do not believe the conditions support higher valuation multiples for the wireless industry as a whole,” he said.

On ABPU, Mr. Fan believes Rogers has the most room to keep growing, noting that it has a larger base of prepaid customers, who pay a lower monthly rate, giving the carrier an opportunity to convert them to more lucrative contract subscribers.